Good Deflation and Bad Deflation

For an in-depth understanding of the concept of Deflation, one needs to be well-acquainted with the two primary types or conditions of Deflations, namely the Good Deflation and Bad Deflation. In fact, both Good Deflation and Bad Deflation facilitate a clear understand of the nature of Deflation and its characteristic features.

Under normal circumstances, Deflation does not seem to be a good phenomenon, affecting the economy of a nation. At times, it is looked upon as a situation even worse than an economic depression. Theoretically, Deflation refers to low price of goods, which is indeed a matter of great relief to the consumers. But in reality, it is the Good and Bad Deflations which affect the economy of a nation.

What is Good Deflation?

Good Deflation should not be considered as a hypothetical situation. It is very much a real condition of the economy, characterized by substantial growth and development in some sectors of a country, despite the fact that the prices of products in these sectors has been reducing since a long span of time.

In fact, Good Deflation results from technological progresses, which initiates excess supply of goods.

Its role:

From the consumer's point of view, Good Deflation is immensely beneficial as it helps those commercial sectors like the bank to deal with sinking prices. The banking sector of a country faces such as a situation, when the value of the collateral (securities) for loans decreases remarkably, having low sale value than what was earlier expected. This condition is far more aggravated by public debts and unemployment problem, which display rising trends.

This situation is controlled to considerable extents by the advent of Good Deflation. In the theoretical sense, Good Deflation does not allow the distribution of corporate gains among the employees, in the form of increase in their wages. Instead, decrease in the prices owing to Deflation is transferred to the consumers. This leads to uniform allocation of the profits, involving those also, who are not directly associated with production.

The debtors should evade price fall, which appears to them in the form of low rates of interest.

Good Deflation can only work when people have full faith in the future of the concept, which is closely related with the consumption and investments on their part. In fact, the customers consume and invest to meet their requirements and not the price expectations.

For Good Deflation to exist in an economy, it is required that there is no interference of any strong union, who may insist on productivity gain on behalf of the employees.

About Bad Deflation:

Bad Deflation is born out of trifling demands. It is an economic situation characterized by reduction in the prices not due to developments in the productivities, but because of a lack of demand induced by crashing down of the stock market. In fact, Deflation becomes bad when the consumers save their money for future uncertainties, or in the expectation that prices may lower further.

Its implications and consequences:

It is the cumulative process of very little generation of demand which affects the population of a country at the time of Bad Deflation. Detection of Bad Deflation thus requires an in-depth study of the overall economic conditions of a nation and not just the price of goods.

Owing to Bad Deflation, the consumers who are the potential purchasers become unwilling to invest and buy, considering the future of their money and the country's economy. This leads to a fast fall in the prices, worsening the overall economic conditions further. Under the impact of Bad Deflation, the recessions are virtually all transformed into depressions. In reality, it is not the price fall of Bad Inflation which matters, but the serious consequences it gives birth to.

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Contributors

Professor of Economics & Director of the Earth Institute at Columbia University. Special Adviser to the UN Secretary-General on the Millennium Development Goals. Founder & co-President of the Millennium Promise Alliance.

Mario I. Blejer is a former governor of the Central Bank of Argentina and former Director of the Center for Central Banking Studies at the Bank of England. Eduardo Levy Yeyati is Professor of Economics at Universidad Torcuato Di Tella and Senior Fellow at The Brookings Institution.

Vice President and Director of the Global Economy and Development Program at the Brookings Institution. Former Turkish Minister of State for Economic Affairs. Head of the United Nations Development Program (UNDP) from 2005-2009.

Andrea Edwards has worked in marketing and communications all over the globe for 20 years, and is now focused on her passion – writing. A gifted communicator, strategist, writer and avid blogger, Andrea is Managing Director of SAJE, a digital communications agency, and The Writers Shop – a regional collaboration between the best business writers in Asia Pacific